Bitcoin is a digital, decentralized, partially anonymous currency, not backed by any government or other legal entity, and not redeemable for gold or other commodity. It relies on peer-to-peer networking and cryptography to maintain its integrity.[1] Its proponents argue that Bitcoin has many properties that could make it an ideal currency for mainstream consumers and merchants. For example, bitcoins are highly liquid, have low transaction costs, can be used to send payments quickly across the internet, and can be used to make micropayments. This new currency could also hold the key to allowing organizations such as Wikileaks, hated by governments, to receive donations and conduct business anonymously.[2]

Amazingly, as of October 2011, a bitcoin (currency ticker BTC) is worth about two U.S. Dollars (USD), there are about $20 million worth of bitcoins in existence,[3] there are probably around 20,000 Bitcoin users,[4] and over $300,000 worth of bitcoins are traded every day.[5]

Although the Bitcoin economy is flourishing, users are anxious about Bitcoin’s legal status and the possibility of a government crackdown.[6] Some point to Bitcoin’s ability, like all digital and anonymous currencies, to facilitate money laundering, tax evasion, and trade in illegal drugs and child pornography.[7] Indeed, the U.S. government prosecuted and shut down the creators of e-gold, a digital currency backed by gold, under state and federal laws for conspiracy to commit money laundering, and also for providing services to those involved in “child exploitation, credit card fraud, and wire (investment) fraud.”[8] Others point to governments’ purported interests in protecting their economies and monopolies on minting new money.[9] These individuals point to the successful prosecution and conviction of the creator of the Liberty Dollar, a paper and coin-based currency backed by gold and other precious metals.[10]

Part II explains how Bitcoin works and Part III describes its nascent ecosystem of websites and services. Part IV compares Bitcoin to its competition, including payment processors like PayPal and digital gold currencies. Part V explores whether Bitcoin can be a sustainable currency and why individuals would trust a currency not supported by any legal institution and not redeemable for any commodity. Part VI explores a few of the many legal ramifications of Bitcoin, including statutes supposedly aimed at enforcing the federal government’s monopoly on issuing currency and securities regulation.